@Toksica by tax law definition rental real estate activities are passive. with active participation uo to $25,000 in losses may be allowed but that in part depends on your adjusted gross income you loss the ability to deduct $1 of that limit for each $2 your adjusted gross income is above $150K so with adjusted gross income of $200K you get zero. the only way around the passive loss rules for real estate is to be a real estate professional.
The IRS Publication 925 establishes the criteria necessary to qualify as a real estate professional for tax purposes. The real estate professional rules are as follows:
More Than 50% Rule
The first qualification set forth by the IRS states that more than half of the services performed within the tax year were in “real estate property trades or businesses.” This is commonly referred to as the more than 50 rule, meaning more than 50 percent of your working hours must be in real estate. The more than 50% rule generally eliminates anyone with a full-time job outside of real estate from being classified as a real estate professional. For example, if you work 40 hours a week at Google and spend about 5 to 10 hours per week managing a rental property — you will not qualify as a real estate professional when tax season comes around.
750 Hour Requirement Rule
The second qualification for real estate professionals requires them to spend more than 750 hours in a year performing services related to real estate trades or businesses. To put that in perspective, a typically 9 to 5 employee works between 1600 and 1900 hours per year. The 750 hour requirement is calculated annually (from January to December) and there is no limit on when the hours are worked — so long as they fall within the tax year. The activities that count towards this professional requirement include:
Rental unit management
New Construction
Property and business operations
Time spent as a real estate agent or broker
Property development or redevelopment
Property acquisition
Real estate professionals are also generally told to consider their property interests as one business activity rather than separate businesses. That way, property management and operations on each home count towards the 750-hour requirement (versus each property having its own 750-hour requirement). Further, keep in mind that real estate professionals must document and prove these hours to the IRS.
Single Taxpayer Requirement Rule
The above qualifications must be met by each person hoping to receive the real estate professional tax designation. In other words, you cannot combine hours with your business partner, and both receive the real estate professional tax benefits. Each taxpayer must prove the 50 percent rule and 750-hour requirement annually to be considered. However, there is an exception for married couples filing jointly. If you or your spouse meet the above requirements, the benefits of being a real estate professional would apply to your combined income — even if one spouse earned their primary income outside of real estate.
Material Participation Rule
The IRS uses a system called the material participation test to determine if your working hours can count towards your designation as a real estate professional. These tests are a way for investors to prove that they materially participate in real estate business activities — rather than acting as passive owners. Generally speaking, you must meet at least one out of seven material participation criteria. One of the most common examples is to participate in the activity for at least 500 hours. As you might guess, this is frequently used because professionals must already prove that they work 750 hours in real estate. Be sure to identify all of the businesses or real property trades that you materially participate in.
